The Australian Dollar (AUD) has weakened against the US Dollar (USD) following an unexpected rate cut by the Reserve Bank of New Zealand (RBNZ) on Wednesday. The RBNZ reduced its Official Cash Rate (OCR) by 25 basis points to 5.25%, down from 5.50%. Given the strong economic ties between Australia and New Zealand, including trade and investment, such monetary policy changes can influence their respective currencies.
Despite recent support for the AUD from elevated Australian wage growth in the second quarter, which led the Reserve Bank of Australia (RBA) to adopt a hawkish policy stance, the currency faces pressure. The RBA decided to keep the cash rate unchanged at its last meeting to ensure inflation aligns with its 2-3% target. RBA Governor Michele Bullock has dismissed the likelihood of rate cuts in the next six months, stressing the bank’s vigilance regarding inflation risks and its readiness to raise rates if needed. Traders are awaiting upcoming Consumer Inflation Expectations and Employment data from Australia.
Meanwhile, the AUD/USD pair found some support as the USD weakened following weaker-than-expected Producer Price Index (PPI) data from the US, released on Tuesday. Market participants are looking forward to the US Consumer Price Index (CPI) report for insights into the Federal Reserve’s interest rate trajectory.
In market news, Atlanta Fed President Raphael Bostic expressed increased confidence in achieving the Fed’s 2% inflation target based on recent economic data, though he indicated that more evidence is needed before endorsing a rate cut. The US Core PPI for July rose 2.4% year-on-year, below the previous reading of 3.0% and missing the estimate of 2.7%. The overall PPI increased by 2.2% year-on-year in July, below the expected 2.3%, and saw a 0.1% month-on-month rise.
Australian economic indicators include Westpac’s Consumer Confidence, which improved by 2.8% in August after a 1.1% decline in July. The Wage Price Index remained steady with a 0.8% increase in Q2, slightly below the anticipated 0.9%. RBA Deputy Governor Andrew Hauser attributed persistent inflation to weaker supply and a tight labor market, noting significant uncertainty surrounding economic forecasts.
Geopolitical tensions, particularly in the Middle East, could temper the AUD’s upside potential. On Sunday, Israeli Defense Minister Yoav Gallant informed US Defense Secretary Lloyd Austin of Iran’s military activities suggesting a potential major strike on Israel, as reported by Axios.
Federal Reserve Governor Michelle Bowman highlighted ongoing inflation risks and strong labor market conditions, indicating that the Fed may not lower rates at its September meeting. Westpac has adjusted its RBA rate cut forecast to February 2025, from the previously expected November 2024, and revised the terminal rate forecast to 3.35%, up from 3.10%, signaling a more cautious RBA stance.
Technical Analysis:
The AUD/USD pair is trading near 0.6640 as of Wednesday. Technical analysis shows the pair moving upwards within an ascending channel, indicating a bullish trend. The 14-day Relative Strength Index (RSI) has exceeded the 50 mark, reinforcing the bullish momentum. The pair might test the upper channel boundary at 0.6675, with a breakout potentially pushing it towards a six-month high of 0.6798. Support levels include the nine-day Exponential Moving Average (EMA) at 0.6587 and the channel’s lower boundary at 0.6575. A drop below this support could lead to a bearish outlook, with potential further decline towards 0.6470.
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